Puerto Rico: Should We or Should We Not Step In

The “isla del encanto,” or the “island of enchantment,” also known as Puerto Rico, has been cursed for quite some time now and is dire need of some financial assistance.

Puerto Rico may be known for raising beauty queens, making tons of delicious rum and being the “Lechon James” of roast pork, but when it comes to the economy — let’s just say, it could do better. A lot better.

With the US being a player in the current state of affairs and Puerto Rico messing up financially, should the United States bring out the bailout cauldron and save the tropical economy from spoiling even more? Well, we’ve come to find that it’s not as clear-cut of a decision as we’d like to it be.

Snowballs in Puerto Rico?

The $37 million in bond payments that the government did not pay out at the beginning of 2016 comes as no surprise to debt holders around the world. The economic woes of the Caribbean vacation destination have been apparent since well before the financial crisis of 2008 and was only exacerbated by the resulting Great Recession.

For more than a decade, Puerto Rico has been far from exemplary when it comes to financial literacy. The government has consistently overspent and has not adjusted the budget much at all. Governor Alejandro Garcia-Padilla, elected in 2012, tried to slash the budget and raise taxes, but the methods have failed. The government has instead issued bonds, or gotten themselves into more debt, as a way to muster up the cash to keep the government going.

But, those bonds are being issued with a higher premium, or surcharge, because the island has been in fiscal trouble. The higher the risk, the higher the payout. This results in a debt snowball that becomes virtually impossible to manage.

We know that if we spend more money than we take in, and keep borrowing year after year in order to keep spending more money than we take in, we’re heading toward bankruptcy. The only thing is, Puerto Rico doesn’t have the option to file for bankruptcy, or Chapter 9, like other municipalities in the United States. Yet.

On one hand, they could step in and essentially bailout Puerto Rico by allowing bankruptcy protections. This would probably be the best tasting option as Congress could oversee a lot of the restructuring of their debt and keep them from going further into debt. In addition, creditors (the bondholders) will be able to breathe easier knowing that Congress is in charge of restructuring their debts. They probably won’t get all the money they’re owed, but they will be able to negotiate to receive a large portion of that debt.

On the other hand, Congress could let Puerto Rico handle this financial calamity on their own. This would leave it all up to the creditors and the commonwealth’s government to duke it out. This option would, of course, just plain suck for not only the bondholders, which we shouldn’t really give a darn about since everyone knows that Puerto Rico is a supremely risky investment. But, it will hurt for the residents of the island because even more of them will be laid off.

Ah, The Double-Edged Sword

In a country where 900,000 people hold jobs, one third, or 300,000 of those jobs, are government jobs. To fix the problem of fiscal insolvency, the government would have to do a massive lay-off of its employees. But with the population migrating to Florida, unemployment at 15 percent and a shrinking GDP, this would be more than devastating.

What are your thoughts on Puerto Rico? Should we or should we not get involved with this island’s mess? Or should we recommend our first solution we offered back in July of 2015: a Jurassic Theme Park?

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Published by Kevin D. Gomez

Kevin D. Gomez is an Instructor of Economics at Creighton University and Program Manager at the Institute for Economic Inquiry. He received his B.S. in Economics and Statistics from Florida State University and his M.A. from George Mason University. Trying to pay it forward by helping noneconomists make sense of the crazy world.
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